German Economy: The catching-up of emerging markets (especially China); demographic change; and digitization are the three central challenges that could have a significant impact on Germany‘s competitiveness in the future. Germany must be better prepared for this. Germany can focus on three fields of action to achieve this:

  • securing its competitiveness;
  • creating stable framework conditions in the EU;
  • and supporting a rules-based international order.

Securing Germany‘s future competitiveness

In order to survive in international competition in the future, productivity in Germany must be increased. This is the only way to secure jobs, and thus income, in Germany, otherwise products manufactured in Germany will no longer be in demand by consumers –  abroad or domestically. In view of the expected aging of society, higher productivity increases are urgently needed. The entire education system needs to be looked at, starting with early childhood education via general schools, the dual vocational training system and the entire higher education system through to learning in adulthood.

A nationwide quantitative and qualitative expansion of childcare, particularly in the under-three age range, is also an important basis for ensuring the employment of both men and women and continuing to support the now rising birth rate in Germany. In addition, increased investment is needed – both in the private and public sectors – because high productivity requires not only a well-trained workforce, but also efficient machinery and technology.

Create stable framework conditions in the EU

Germany needs a long-term stable EU with a stable Euro. If necessary, transfer payments will be necessary to prevent the Eurozone from disintegrating. As mentioned above, a further measure to stabilize Europe‘s economy is to reduce Germany‘s high export surpluses, which are increasingly met with criticism in the rest of the world (see Petersen 2015 for the following remarks).

In other European countries, accusations have been growing that German exports are displacing domestic products, and thus increasing unemployment in the affected countries. There will be no automatic reduction of German export surpluses within Europe because membership of the monetary union means that there will be no appreciation of the German currency, which in terms of a flexible exchange rate for the individual European currencies would reduce this surplus. However, the necessary reduction in Germany‘s current account surpluses should not be so abrupt as to lead to massive losses in production and employment in Germany. Such an economic loss would cause Europe to lose its “economic upswing locomotive”. As a result, other European economies would have to accept economic loss as well. No one would benefit from this development.

Support a rules-based international economic order

As an export-oriented economy, Germany has a central interest in functioning world trade. Germany should support the expansion of free trade and help to shape corresponding agreements. Ideally, this should be done within the framework of a multilateral agreement such as the World Trade Organization. However, this is currently undergoing a difficult reform process. The second-best alternative, is therefore regional free trade agreements (FTAs), in order not to have to do without an intensification of international trade. Examples for FTAs include the EU-Japan and the EU-India FTA (see figure below for the potential welfare effects of the latter).

Central principles of the social market economy, such as labor, social and environmental standards, must be considered in the negotiations of these agreements. Within this framework, Germany should generally advocate open markets, but at the same time make it clear that reciprocity and fair competitive conditions are central prerequisites for this. If a global economic actor, such as China, systematically violates them, measures should therefore be possible to protect German and European interests from unfair competition. In general, the principle of non-discrimination must be upheld.